Fed’s Balance Sheet Could Take Nearly 10 Years to Normalize

It may take the Federal Reserve nearly a decade to bring its massive balance sheet back toward a more historically normal size, Goldman Sachs economists argue in new research.

Forecasters at the firm say that if the Fed presses forward with its expected path of stimulus and continues to buy Treasury and mortgage bonds through the third quarter of 2014, it is unlikely that its balance sheet will get back toward a historical norm of around 6% of GDP until 2022.

The Goldman note argues the most likely path for the Fed is that what is now a balance sheet of just over $3 trillion will top out at around $4 trillion when the Fed feels confident enough about the outlook to end its ongoing and currently opened ended campaign of bond buying. The bank expects the Fed to contract its balance sheet by allow its holdings to mature instead of actively shrinking its holding via sales.